Hedgeye Was Short (And Remains Short) Twitter | $TWTR

Twitter’s long-term growth prospects look increasingly suspect. Shareholders learned that lesson the hard way after the bell yesterday. The stock has fallen 7% after the social networking site reported declining “monthly average users.” In other words, fewer eyeballs viewing ads and lower revenue guidance.

The miss was no surprise to us here at Hedgeye. In fact, the bearish case on TWTR has been the mantra of Hedgeye Internet & Media analyst Hesham Shaaban since issuing his original Black Book on the stock, pre-IPO on Nov. 2013.

Since then shares are down 30%.

Here’s a small snapshot of a research update sent out to subscribers this morning.

And two recent HedgeyeTV videos of Shaaban laying out our bearish Twitter thesis.

The Crossroads: Here’s What Twitter Management Needs to Do, 9/3/2015

Why Twitter's Problems Run Deep, 6/15/2015

Editor's Note: If you’d like to learn more about our institutional research offerings or access our Twitter research please pingsales@hedgeye.com.

The only thing better than a Greatness Agenda is a Greatness Agenda part 2. There wasn't much meat to this press release outside of the new concept announcements (Fila Outlet Stores, KSS Off Price, and 5-10 35k sq. ft. stores) and Mansell reiterating the $21bn in sales by 2017. That sales target has nothing to do with the four pillars the management team adamantly insists are performing at or above plan despite the fact that the actual proof measured by comps in our book has been far below the 3% annual comp the company needs to report if it wants to hit its sales targets. Just to hit the 1.5% - 2.5% guide for the year KSS needs to print a 2H comp of 2% - 4% after a 0.7% in 1H against much tougher compares.

That leads us to believe that if KSS isn't going to hit its $21bn organically. Meaning its going to put more emphasis on non-core business to manufacture a little bit of top line growth with little concern about what that does for either margins or returns.

KSS remains one of our top short ideas. The bigger call on the name is that annual earnings are likely to never grow again. To put that into context, we’ve got numbers between $3.25-$3.75 from 2016-18. That’s 30% below the consensus, which has earnings marching over $5.00.

Tory Burch - Tory Burch and Roger Farah say they have no plans to go public and they enjoy running a privately held company.

Ms. Burch can say all she wants that she has no intention of going public -- but that was not always the case. Farrah was brought in from Ralph Lauren to drive the next leg of growth and then take it public. But a couple of things have happened since. 1) the 'space' imploded' in the equity market, and 2) trends at Tory Burch have been a lot closer to Kors, Coach, or even Ralph Lauren than Kate Spade (which is crushing it). Our sense at this point is that Farrah will do his 'thing' at Tory over the course of a couple of years until the growth characteristics of the company will allow it to go public at a premium multiple regardless of the liklihood that Coach will still be clinging to unrealistic margin and growth targets.

BGFV - 3Q15 Earnings

The headline earnings number and revenue were a little weak, but that underscores the actual trends in the business. Earnings were down 20% in the quarter on a -0.4% comp. The mid-point of the 4th quarter guide if we back out the benefit from the 53rd week implies earnings down 30% in the 4th quarter as QTD comp trends are down in the LSD rate. Add to that the fact that BGFV just hired a consultant to assess growth plans and try to fix the P&L after the e-comm launch ate away 200-300bps of margin.

TWTR | Auto-Play Action (3Q15)

Takeaway:It appears TWTR's monetization targets are still trumping its user growth priorities, which is becoming a longer-term structural issue.

KEY POINTS

BAD PRINT, SMART MOVE: TWTR 3Q's results came above estimates, which was largely expected given the preannouncement. MAU growth wound up missing expectations, with US MAU growth slowing to 5% y/y (ex FFs). TWTR took its first step toward rebasing 2016 expectations by issuing 4Q guidance ~$40M below consensus estimates, with the midpoint of guidance assuming 47% y/y growth, which is a deceleration of 11 percentage points from 3Q15, and basically inline with what consensus is expecting for growth for all of 2016 (45%). Naturally, we should expect 2016 estimates to come in from here; question is how much.

AUTO-PLAY ACTION: TWTR’s ad engagements spiked 94% sequentially, alongside a -42% decrease in CPE; collectively a divergence that we haven’t seen since the 2Q13 Supply Shock, suggesting that TWTR may be stuffing the feed with more ad load (see chart and note below for detail). While mgmt suggested that ad load remained flat q/q, it also stated that autoplay "uses less inventory on a monetization basis". That basically means that auto-play has a lower engagement threshold vs. TWTR's legacy ad products (e.g. 3-second view vs. ad click). That said, TWTR essentially swapped out its legacy ad load for more intrusive ads that are harder to avoid, which is basically the same thing as stuffing the feed.

MORE OF THE SAME? We suspect TWTR has been chasing short-term upside at the expense of long-term damage to its model in the form of cumulative US MAU churn (HRM survey = 38%), which we attribute to surging ad load. While mgmt unapologetically guided light for 4Q, which is encouraging, it still appears that its monetization targets are trumping its user growth priorities (Point 2). That said, if TWTR continues to chase estimates with excessive increases in ad load next year, it will come with the risk of a potential y/y decline in US MAUs. We wouldn't be too quick to rule that out given its heightened cumulative churn and growth already slowing into the mid-single digits.

See notes below for supporting analysis on TWTR's user retention issues and monetization strategy. Let us know if you have any questions, or would like to discuss further.

Draghi Whacks Oil

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Oil was slammed by Draghi’s Devaluation, closing down another -1.8% yesterday (WTI), taking it to -5.2% in the last week alone. It's still very much in crash/deflation mode -47% year-over-year. Witness the carnage in Oil & Gas stocks (XOP) -2.9% yesterday too.

Yeah, #NoWorries. Everything you had to be long for the 1st two weeks of October, like Oil & Gas stocks (XOP), U.S. Transportation (IYT), and Biotech (IBB) has gone straight down in the last 3 trading days post the Draghi Devaluation => USD Up Deflation.

Purchase Apps | Equivocal ... Waiting on PHS

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

Today's Focus: MBA Mortgage Applications

The Data: Purchase Apps declined -3.1% WoW but accelerated back near the fastest pace of growth YTD at +23% YoY.

The Distortion: The TRID related pull-forward in demand and its subsequent reversal convoluted the first two weeks of October data (see 1st chart below). The last two weeks of semi-clean data have averaged 194.3 – which compares to the 3Q average of 202 and the YTD average of 194.4.

So the data was marginally softer sequentially, better on a year-over-year basis and largely in-line with the recent quarter and YTD trend. Discerning a discrete inflection in trend from a single, middling print in a volatile high-frequency data set is challenging, particularly with some measure of residual distortion likely still impacting volumes.

The Disagreement: We’re more interested in tomorrow’s PHS data for September which we hope will serve as the arbiter of the underlying demand Trend/TRID implementation impact as the Purchase Application (up significantly) and New Home Sales (down significantly) data for September told antithetical demand stories.

The preponderance of housing data remains strong (HPI, HMI, EHS, Purchase Apps, Interest Rates, Seasonality, Election Cycle, etc) but given the NHS decline alongside the emergent slide in consumer confidence, the recessionary data in the industrial space and twin softness in the Aug/Sept Employment reports, we’re more acutely focused on marginal shifts in the data than we have been in a while.

About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis.

Frequency:

The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.

Joshua Steiner, CFA

Christian B. Drake

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